Our experts share their views on today’s announcement from the UK Chancellor of the Exchequer, Jeremy Hunt, which sought to give near-term support to the economy.
The UK government has set out its Autumn Statement, which will have implications of the economy and markets. Here’s some views from our experts:
Azad Zangana, Senior European Economist and Strategist
Today’s statement was about providing near-term support for the economy, which is likely to already be in recession, while re-assuring financial markets that the government will reduce borrowing over the medium to long-term. The new chancellor, Jeremy Hunt, avoided the mistake of his predecessor and instead involved the independent Office for Budgetary Responsibility (OBR) in providing a fiscal and economic forecast.
Amongst the plethora of announcements, the most important were around energy bills, benefits and pensions and personal taxes. The so-called energy price guarantee will now have its cap for the average household dual tariff annual bill lifted from £2,500 to £3,000 from April 2023, and remain in place for a further 12 months. This is less generous that the original plan to cap bills at £2,500 for two years. Other support measures were also announced for more vulnerable households.
Disability benefits, pensions credits and the state pension will all be uplifted with inflation (10.1% for the reference month). Meanwhile, the threshold for the additional rate of income tax (45%) will be lowered from £150,000 to £125,140, pulling many more individuals into the highest tax bracket.
Departmental spending will generally increase in nominal terms over the next two years, but then rise by 1% in real terms from there on. This means that departments, will have to find ways to cut spending in real terms in the immediate future. Additional funds were allocated for education, healthcare and adult social care, but the majority of other departments will struggle.
There was also emphasis on maintaining capital expenditure, and focusing on drivers of growth, including energy security, infrastructure and innovation. The first new nuclear power plant in 30 years will be approved, which is seen as crucial for boosting capacity. However, the introduction of vehicle excise duty on electric vehicles from 2025 (currently exempt) will reduce the incentive for those considering switching to the greener form of transport.
In terms of the outlook for the economy, the OBR has revised up its forecast for growth for 2022 from 3.8% to 4.2% since its last forecast in March, but has slashed 2023 forecast from 1.8% to -1.4%, largely owing to the inflation crisis at present. The economy is forecast to return to positive growth of 1.3% in 2024 and 2.6% in 2025. CPI inflation is forecast to average 9.1% in 2022 and 7.4% in 2023, before falling to 0.6% in 2024 and -0.8% in 2025. Meanwhile, the unemployment rate is forecast to peak at 4.9% in 2024, before slowly falling back in subsequent years.
The OBR’s analysis suggests that the measures announced in the Autumn Statement reduce the depth and length of the recession this year and next, but leaves the economy on a similar growth trajectory over the medium term. The latter should disappoint the government as it suggests its effort to lift growth in the medium term are not expected to make a difference.
In terms of the public finances, the OBR sees the deficit rising from 5.7% of GDP to 7.1% of GDP this financial year, before falling to 5.5% in 2023/24 and 3.2% in 2024/25. The measures outlined mean additional borrowing of £4.1 billion this year and next, before more significant austerity begins. Most of the additional tax revenues will arrive in 2024/26, while the spending cuts will help from the following year.
Overall, a pretty bleak budget for many, and despite stating that inflation is the enemy, many of the measures announced do little to reduce inflation. A similar approach to the past has been taken. Borrow more now, promise to borrow less in the future. But at least with this fiscal statement, there is that promise to tighten belts at some point. Market reaction: sterling down against both US dollar and euro, gilt yields higher, but nothing as dramatic as the last mini-budget.
Ashley Thomas, Fund Manager, UK equities
The statement has implications for a number of sectors, including power generation as well as the oil & gas exploration and production industries. It also touches the infrastructure, defence, retail, leisure and housebuilding sectors, although the announcements look largely in line with the press reports earlier this week.
Windfall taxes on the oil and gas sector have been extended with the Energy Profits Levy rate increased from 25% to 35% from January 2023. The levy had previously meant to have ceased in 2025 and the higher rate will now apply to March 2028, in line with what we’d been led to expect.
Meanwhile, low carbon electricity generation (nuclear, renewable and biomass) will also incur additional tax at a rate of 45% over a similar period for earnings achieved over a benchmark power price of £75 per megawatt hour.
Markets value certainty, which has been lacking for the power generation sector over the past six months.
Going forwards, greater emphasis will be placed on improving domestic energy security and energy efficiency. For energy security, offshore wind, carbon capture & storage (CCS) and nuclear were referenced with the 3.3 gigawatt nuclear new build Sizewell C plant to be given approval.
On energy efficiency, the government is targeting a reduction in energy consumption from buildings and industry by 15% by 2030 (equivalent to £28 billion national saving or £450 off average bill). Spending on energy efficiency measures will nearly double from £6.6 billion to £12.6 billion per annum (pa) to accelerate energy efficiency measures.
With regards to infrastructure, the government has committed to maintaining the capital budget for the next two years and keeping it level in cash terms following three years. It plans to deliver core projects such as Northern Powerhouse Rail and HS2 to Manchester, East Coat Rail, Hospitals Programme and Gigabit broadband.
The £13.6 billion business rates relief package will benefit retailers and pubs and largely offsets the £3 billion pa inflation related rise that would come into effect from next April. Housebuilders will benefit from the cuts to stamp duty announced by the former chancellor until 2025.
There is no change to spending at around 2% of GDP, subject to further review and this level will be updated at next budget. The market had already discounted a walk-back from the 3% targeted by Liz Truss.